Labor Market, Service Sector Growth Unexpectedly Slows

Those who argue the U.S. economy is weakening may have received further support for their argument.

U.S. employers boosted payrolls in July at the slowest pace since February, adding 92,000 jobs as the national unemployment rate ticked up to its highest level since the beginning of the year, a government report on Friday showed.

In addition, a separate report showed the U.S. service sector grew much more slowly in July. The Institute for Supply Management's services index fell to 55.8 last month from 60.7 in June, well below forecasts for a drop to 59.0. A number above 50 indicates growth.

The services sector represents about 80% of U.S. economic activity, including businesses like restaurants,hotels, banks and airlines.

Meanwhile, the Labor Department's report also included revisions to its estimates for job creation in each of the two prior months by a total of 8,000 - to 126,000 in June from a previously reported 132,000 and to 188,000 in May instead of 190,000.

July's new-job total was the smallest for any month since February when 90,000 were created. The consensus forecast of economists in a week-old Reuters poll was for 130,000 new jobs in July.

U.S. Treasury debt prices rallied after the payrolls data was issued as investors judged that it pushed chances for any hike in official interest rates by the Federal Reserve even further into the future. Stock futures dropped as did the dollar's value against other major currencies.

The 4.6% unemployment rate in July was the highest since a matching 4.6% in January and the last time the rate was higher was in August last year when it reached 4.7%, department officials said.

Analysts said the July job numbers, while lower than many had expected, should not be taken as a sign the economy was at risk of a downturn.

"It's moderately softer but it's not enough to change the overall trend of the economy," said Pierre Ellis, senior global economist with Decision Economics Inc. in New York. "The start of the third quarter remains relatively healthy."

The Fed's policy-setting federal Open Mark Committee holds a one-day meeting on Tuesday and is universally expected to keep its trend-setting federal funds rate at 5.25%, where it has been for more than a year.

In the first seven months of 2007, average job growth has eased to 136,000 per month from a more vigorous 189,000 throughout 2006.

All the July job growth came in service industries, which added 104,000 jobs while goods-producing industries cut 12,000 positions. The government shed 28,000 jobs in July, the first time in more than a year and half that the government has cut hiring.

Construction industries shed 12,000 jobs in July, a potential sign of the distress the housing sector is experiencing.